Korporaal comment: Deloitte report puts the spotlight on super fund boards

As the super sector grows, there is pressure on the boards to have skills needed to oversee huge funds.

The Deloitte report into governance issues at the $94bn construction industry super fund Cbus has thrown a spotlight on the increasing pressure for more professionalism on the boards of industry super funds.

From modest beginnings in the union movement in the eighties, to the introduction of compulsory super in the early nineties, the industry super fund sector has gone from a twinkle in the eye of union leaders such as Bill Kelty and ALP leaders including Paul Keating and Bob Hawke, into a powerhouse managing $1.4 trillion in funds, with 14 million members. It dwarfs the once powerful retail super sector, which has assets of $756bn and six million members.

As the sector grows, and plays an increasingly influential role in the financial system, there is pressure on the boards to have skills needed to oversee funds of $100bn, and AustralianSuper’s $350bn.

While the Deloitte report ­focuses on the issues at Cbus, which is soon to join the ranks of the $100bn-plus funds, it has implications for the sector.

The industry funds have been built on a unique model of having “equal representation” – equal board nominees from the unions on the one side and the employer groups on the other side.

The Cbus board is made up of six representatives of construction industry unions, with three from the Construction Forestry and Maritime Employees Union (CFMEU) including its current president, long-time union leader Paddy Crumlin, who has run the union since 2021.

Employer groups have six nominated directors, including Denita Warn, the chief executive of Master Builders Australia.

The fund has an independent chair, former federal treasurer and current ALP president Wayne Swan, and former journalist, Paul Keating staffer, economist and Reserve Bank board member John Edwards.

There are those who argue that Swan is not truly independent because of his ties with the ALP, which until recently had links with the CFMEU.

But the broader issue is the fitness of the “equal representation” model, a unique model that its supporters argue has done well, delivering strong returns (until recently above the retail super funds), for the $1 trillion superannuation sector of the future.

The demands on the directors in terms of skills and experience for this now financial colossus are much higher than they ever were.

The Deloitte report, commissioned in August as a result of a request by super fund regulator the Australian Prudential Regulation Authority following media reports about the CFMEU, is one of the first recent independent reviews that has sought to address the current challenges of the equal representation model.

It notes that the model has been criticised for putting limitations on the skill set of those on the super fund boards to meet equal representation requirements.

But it argues that the reality is that the funds have, by and large, put in “robust governance mechanisms” and that the model provides a “unique protection” for the interests of employees and employers “by bringing those voices directly to a board meeting room”.

That said, while it declares that all current Cbus board members are fit and proper to hold the roles, it still makes a range of recommendations to strengthen the ­appointment process for Cbus ­directors to make sure they meet the “fit and proper test”, including a process that could allow a fund’s board to reject a nominee from ­either side if they were not deemed suitable.

But there is a broader issue of the skill set of directors beyond a well-meaning background in the industry sector. These days many of the larger funds are big investors offshore, with the big ones now setting up offices in London and New York. They are complex organisations with global investment mandates that are having to manage issues such as foreign exchange and liquidity risks.

They are increasingly having to deal with issues of serving millions of members, many of whom are moving into retirement and are much more demanding of ­attention from their super fund than ever before.

As the controversy over complaints around super funds – particularly over handling life insurance and other claims – rises, the demands on funds to invest significant sums in upgrading their IT systems and fund administration are skyrocketing.

Add to that the needs for the boards to be able to deal with ­issues such as cyber security, artificial intelligence, and managing the demands of members moving into retirement, and it is no longer good enough for super fund directors to be “well-meaning”.

There was a point, a few years ago, when the appointment of more independent directors was seen as an answer.

The previous Liberal government wanted to legislate for a model for super funds to have a third of their directors from the union side, a third from the employer side and a third independent, including the chair.

It was unable to get the legislation passed, but the sector has moved to have some independents, with the actual appointments varying from fund to fund.

Having independent directors is a good start, but it is not enough.

It is possible for funds to retain the equal representation model but, instead of nominating union leaders or those in employer organisations, they could nominate people such as lawyers, accountants and technical experts.

The Deloitte report does not provide the answers, but it starts to raise the broader questions – it finds that the sector is in transition and in need of more governance, and regulation, with directors being appointed with an eye to a much more challenging future and not a benign past.